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A stock market boom during a ﬁnancial crisis? ADRs and capital outﬂows in Argentina
Department of Economics, Arizona State University, Tempe, AZ 85287 -3806, USA Received 9 December 2002; received in revised form 3 April 2003; accepted 6 May 2003
Abstract The surprising Argentine stock market boom during a ﬁnancial crisis is explained as a result of investors using the stock market to circumvent cash withdrawal restrictions and capital controls and shift funds out of Argentina and into the United States. 2003 Elsevier B.V. All rights reserved.
Keywords: Argentina; Financial crisis; American depositary receipts (ADRs); Stock market JEL classiﬁcation: F30; G15
1. Introduction From late 2001 to early 2002, the Argentine economy experienced a crisis of massive proportions. Ultimately, it led to the end of the peso peg against the dollar, drastic foreign exchange and capital controls, a nationwide bank closure, and the largest debt default in history. Yet in the face of economic disarray and social unrest, the Argentine stock market experienced a boom. Between the end of November, 2001, prior to the ﬁrst announcement of restrictions on ﬁnancial transactions, and March 25, 2002, when extensive capital controls were imposed, the Argentine stock market experienced a dramatic rise of more than 217% as measured by the Merval index. The Argentine experience stands in sharp contrast to other recent ﬁnancial crises. If one examines the stock market performance of other countries in the immediate months involving crises, one ﬁnds the following fall in stock market indexes: Mexico (December, 1994–February, 1995), 53.5%; Korea (July, 1997–November, 1997) 47.0%; Malaysia (July, 1997–January, 1998) 52.0%; and Thailand (July, 1997–December, 1998) 33.8%. Yet the Argentine market more than doubled in the early
* Tel.: 1 1-480-965-6860, fax: 1 1-480-965-0748. E-mail address: email@example.com (M. Melvin). 0165-1765 / 03 / $ – see front matter 2003 Elsevier B.V. All rights reserved. doi:10.1016 / S0165-1765(03)00156-3
2001 until the end of March. 2 illustrates a similar phenomenon. Before December. Then in December. the deviation between the Argentine and ADR price ﬂuctuated around zero. the deviation started to 1 Melvin (2002) and Auguste et al. 2001. 2002. 2001 when the government announced the ﬁrst wave of ﬁnancial market restrictions. 2001 the share prices in Argentina and the ADR prices moved closely together. There are 25 Argentine ﬁrms listed as ADRs in the United States. It is seen that the Argentine stock market was steadily falling over 2001 from its high on January 23. the index fell by more than 60%. and Perez Companc. data were taken from Datastream on the daily closing price of the Argentine ﬁrms listed on the New York Stock Exchange (NYSE) that are frequently traded.130 M. the stock market started to rise. To examine the relationship between ADRs and the underlying Argentine shares. The deviation between the closing home market prices and the ADR prices was computed by converting ADR prices into pesos using the daily peso / dollar exchange rate taken from Datastream and dividing by the multiple of Argentine shares the ADR represents.S. securities markets. 2 shows that prior to December. Fig. 2001 to its low at the end of November. The role of U.-listed securities in the stock market boom Our task is not to explain the root causes of the Argentine crisis but. But not all stocks were equally favored. Melvin / Economics Letters 81 (2003) 129–136 months of the crisis of 2001–2002. One could buy shares of the underlying ﬁrm in Argentina using pesos and then have a bank or broker convert the Argentine shares into that ﬁrm’s depositary receipts (ADRs) traded in the United States in dollars. Then following the weekend of December 1 and 2. 2001 and January 7 to January 16.S. Banco Frances. 2001. For this reason. Of these.1 Fig. This paper analyzes the rise in Argentine stock prices as a result of investors using the stock market to circumvent cash withdrawal restrictions at banks and shift funds out of Argentina (and pesos) into the United States (and dollars). 1 illustrates the time path of the Merval stock market index value from the beginning of 2001 until late April. Over this period. rather. While cash withdrawals were limited at banks. suggests that the primary motive for the big movements in the Argentine stock market was the purchase of Argentine shares of ﬁrms that are listed on U. one could use deposits to buy stocks. The ﬂat spots in the index illustrate market closings that occurred from December 21–December 27. 2002. 2001. Three are listed on the NASDAQ and 11 are listed on the New York Stock Exchange (NYSE). 2. for the three most heavily-traded ﬁrms. the stock market started to rise. (2002) provide a chronology of events associated with the equity market. .-traded shares for dollars and deposit the dollars in the United States. An analysis of the share prices in Argentina and in the U. Our focus is on this period of stock market boom in the midst of the ﬁnancial and social crisis in Argentina. 11 are private placements available only to qualiﬁed institutional buyers.S. With the ﬁrst wave of restrictions on withdrawals from Argentine bank deposits and limitations on international capital outﬂows. Each ﬁrm in Fig.S.S. So purchases of stocks provided a venue for recovering frozen deposits. One could then sell the U. we do not discuss likely causal events contributing to the breakdown of the one-to-one parity between the peso and the dollar and the dramatic events of late 2001 and early 2002. Fig. a particularly striking feature associated with the crisis. 2 displays the daily deviation of the price of shares in Argentina from the peso value of the ADR price in the U. The NYSE-listed ﬁrms include the ‘bellwether’ Argentine ADRs: Telecom Argentina. 2002. The Merval index more than doubled in value from the end of November.
1.M. Melvin / Economics Letters 81 (2003) 129–136 131 Fig. . Merval stock market index.
3 shows the share prices in New York for the ADRs of the three most heavily traded ﬁrms. but rather a . Fig. and Telecom Argentina (TEO). Note that all three ADRs were sinking in value throughout the 2001–2002 period. Melvin / Economics Letters 81 (2003) 129–136 Fig. 2. widen. Deviation between Argentine share price and ADR price (in pesos) of three top traded ﬁrms: (a) Banco Frances home–ADR price. Perez Companc (PC). (b) Perez home–ADR price. The home peso price of shares grew substantially at the same time that the ADR price was stagnant. Banco Frances (BFR). (c) Telecom Argentina home–ADR price.132 M. The deviation between the ADR price in New York and the price in Argentina does not reﬂect a failure of arbitrage pressures.
Otherwise. the Argentine closing price would reﬂect stale data from the last day the market was open and the results would be meaningless. . this is also supported by the decline in the Bank of New York ADR index for Argentina. Melvin / Economics Letters 81 (2003) 129–136 133 Fig. To ﬁnd the days of peak value of capital controls avoidance. days where the stock market was closed in Argentina are omitted. Melvin (2002) provides a simple rational valuation model of stock prices that formalizes the argument. The value of capital controls avoidance If the ADR reﬂects the fundamental value of the ﬁrm. This premium should reﬂect the expected capital loss associated with peso investments in Argentina.3 Table 1 presents data on the value of capital control avoidance as implied by the deviation of the home market price from the peso value of the ADR price for the Argentine ﬁrms listed on the NYSE and which are traded with regularity. the two trading days with the largest deviation of the Argentine price 2 In addition to the visual evidence presented in Fig. then the deviation between the price in Argentina and the price in New York reﬂects the value of capital controls avoidance to investors desiring to move wealth out of Argentina.2 The price increase in Argentina over the ADR serves as an empirical measure of the value of capital control avoidance via international cross-listing conversions. 2. For each ﬁrm.M. (continued) premium on local market shares due to the capital controls and the value the market placed on control avoidance. The price in New York reﬂects fundamental values and the ADR prices of Argentine ﬁrms were generally falling throughout the period of 2001 and 2002. 3 The idea of deviations between ADR and underlying share prices incorporating a premium for capital controls was addressed in unpublished work by Levy-Yeyati and Schmukler (1999). 3. 3. including the ﬁnancial crisis period.
Melvin / Economics Letters 81 (2003) 129–136 Fig. Perez Companc (PC).134 M. ADR price in New York of Banco Frances (BFR). and Telecom Argentina (TEO). 3. .
The fact that December 20.2 38.3 20.67 0. This is coincident with new President Duhalde’s ascension to ofﬁce and his announcement that the peg with the dollar would be broken. the table presents the mean percentage deviation and the mean peso value of the deviation for the crisis period of December 3.7 18. January 7 and they remained closed for 9 business days.10 0.4 28.0 26.85 0. It is interesting to note that the days of peak premium over the ADR price are found to be most frequently Thursday.12 0.5 13. In addition. Perhaps more importantly for the timing of the value of capital controls avoidance is that the Argentine ﬁnancial markets were closed on Monday.07 0.78 0. is consistent with some investors anticipating the market closure and inability to trade any ﬁnancial assets in Argentina for an extended time while the peso was devalued.0 40. The average value of the percentage deviation over the crisis period ranges from 8.20 for MetroGas to AGS 1. The table lists these percentage deviations along with the peso values of the deviations on these 2 days.0 33.3 39.38 0.79 1.41 0.3 35. 2002. 2001 was the day of second Table 1 The value of capital controls avoidance Firm Peak value Date Banco Frances IRSA MetroGas Perez Companc Siderca Telecom Argentina Telefonica de Argentina Transportadora de Gas 1 / 21 1/3 1/3 1/4 2 / 14 12 / 20 1/4 12 / 20 1/3 1/4 1/4 1/3 1 / 30 2 / 13 1/4 12 / 20 Percent (%) 45.62 for Siderca.5 Pesos 1.6 40.62 0.20 0.08 1.6 26. which is generally seen to hold for ADRs and the underlying home-market shares.21 0.3% for MetroGas to 20. Table 1 indicates that the maximum percentage deviation ranges from 26. the latter date being the day when ADR conversions were prohibited.3 43.17 0.51 0. January 3 and 4. 2001 to March 25. The average peso value of the deviation ranges from AGS 0. January 3 and Friday.2 24.2% for Banco Frances.71 0. 2002.07 for MetroGas to AGS 0.9 25. The maximum peso value of the deviation ranges from AGS 0.47 0. January 4.57 0.21 0. Melvin / Economics Letters 81 (2003) 129–136 135 from the ADR price are identiﬁed by the largest deviation as a percentage of the Argentine share price.50 Average value Percent (%) 19.4 8. The high value of capital controls avoidance as registered by the premium paid for Argentine shares above ADR values on Thursday and Friday.0% for Perez Companc.71 0.8 36.4 36.M.81 for Banco Frances.3 8.0 Pesos 0.81 1.0 18.19 0.8 17.2% for IRSA to 45.26 . These are substantial deviations from the ‘law of one price’.0 33.
Levy-Yeyati. K. L. as Argentine ﬁnancial markets were also closed from December 21 through December 27. Dominguez. Given the 40% devaluation on January 11 and the later continuing depreciation of the peso. October. A Stock Market Boom during a Financial Crisis? ADRS and Capital Outﬂows in Argentina.136 M. Kamil. January 6. 2002.. 1999. Working paper. Sergio Schmukler. E.E. Arizona State University. Cross-border Trading as a Mechanism for Capital Flight: ADRS and the Argentine Crisis.M. Acknowledgements I thank seminar participants at the European Central Bank. S. Melvin / Economics Letters 81 (2003) 129–136 highest home-market share premiums for three ﬁrms indicates a similar phenomenon. S. Effects of Capital Controls on Capital Markets.. Tesar.. Working paper.. . University of Michigan.. Working paper. June.. Schmukler. although no peso devaluation occurred. Universidad Torcuato Di Tella and the World Bank. those who moved from pesos into dollars before the trading halt announced on Sunday. would have found the equity market premium they paid worthwhile in an ex post sense. M. 2002. Melvin. and an anonymous referee for comments on an earlier draft and Lin Wen for research assistance. References Auguste.. H.